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Derivatives Margin up for Grabs in a Crisis

International regulators say margin posted in derivatives trades could be used to shore up CCPs, if necessary.

Derivatives traders should be prepared to lose the initial margin they post at clearinghouses if it’s needed to prevent a financial crisis, global markets regulators said.

The “margin is likely to constitute a very large pool of assets which would, if it can be used, provide a high degree of loss-absorbency” to help stabilize a central counterparty, or CCP, the International Organization of Securities Commissions and the Committee on Payment and Settlement Systems said in a joint report published yesterday.

The committee is part of the Bank for International Settlements.

The Group of 20 nations has ordered a global overhaul of rules governing derivatives contracts, mandating the use of CCPs by traders. Regulators have sought tougher rules for over-the-counter derivatives since the collapse of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest traders of credit-default swaps.

Clearinghouses such as London’s LCH.Clearnet Ltd. and Eurex Clearing AG operate as central counterparties for every buy and sell order executed by their members, who are required to post collateral, reducing the risk that a trader defaults on a deal.

Madrid-based Iosco brings together national market regulators from more than 100 countries to coordinate rules and share information.

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